Stock market sell-off sets up for volatility

The Australia 200 Index looks like being sold down towards levels not seen since October last year as investors react to Friday’s violent sell off in US equities.

The Australia 200 Index looks like being sold down towards levels not seen since October last year as investors react to Friday’s violent sell off in US equities.

Investors are taking a safety first approach to the stock market given the potential for instability related to capital flight from emerging economies. Until recently investors were looking forward to some US led stabilisation and even improvement in global economies. However, the ongoing sell off in commodities and concerns about growth in China have more people thinking in terms of global deflationary pressure. Growth and inflation concerns come against the background of an environment where Central Bank capacity for further action is low and government reform action is scarce in the developed world.

The December 2013 and October 2014 lows will now become a short term litmus test for the Australian market. Concern about global growth and a so far slightly disappointing profit reporting season highlight the growth challenges ahead for Australian companies. However, value is difficult to find in alternative investment classes and there is scope for volatility with bargain hunters now likely to be looking for any sign that selling momentum is starting to abate.

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